Bank watchdogs approve rule to loosen ban on risky Wall Street trades

Two federal bank regulators voted Tuesday to approve a significant rollback of a controversial ban on risky trades passed in the aftermath of the 2008 financial crisis. 

The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) on Tuesday adopted a weakened version of the so-called “Volcker Rule,” which bans banks from making high-risk bets with their own assets.

{mosads} While the OCC and FDIC are but two of five agencies that must sign off on the new Volcker Rule, their approval of the proposal is the first step in a massive lobbying victory for some of the largest U.S. banks.

The Volcker Rule was one of several provisions of the 2010 Dodd-Frank Wall Street reform law designed to ban risky and overly complex investments that helped crash the global financial system in 2008. 

While advocates for banks have fought to loosen several aspects of Dodd-Frank in the nine years since its passage, firms with mammoth trading desks such as Goldman Sachs have paid particular attention to the Volcker Rule.

Named after its chief advocate, former Federal Reserve Chairman Paul Volcker, the rule bans banks from certain “proprietary” trades, or investments using the bank’s own capital. Industry advocates insisted that while banks supported stricter limits on risk, the Volcker Rule was too complex and burdensome to be effective.

“The new Volcker Rule finalized today is recognition that the original rule was overly complex and unworkable,” said Greg Baer, president and CEO of the Bank Policy Institute, a research and advocacy group representing 17 of the largest banks and financial firms.

“The changes in the new rule will help reduce the incidental damage the original rule has done to responsible banking activity and legitimate market making activity, and the massive and needless compliance costs it imposed.”

But advocates for strict bank regulations said the Volcker rewrite effectively guts the rule and does nothing to prevent the build-up of risk that led to the 2008 financial crisis.

“As the threats from leveraged lending and global uncertainty increase, greedy Wall Street banks and Trump regulators are determined to put the financial system and working families in danger,” said Sen. Sherrod Brown (D-Ohio), ranking Democrat on the Senate Banking Committee.

“Trump regulators continue to open a Pandora’s box of risky trading and speculation at the expense of American taxpayers”

Rep. Maxine Waters (D-Calif.), chairwoman of the House Financial Services Committee, said the revisions “will not only put the U.S. economy at risk of another devastating financial crisis, but it could potentially leave taxpayers at risk of having to once again foot the bill for unnecessary and burdensome bank bailouts.”

Financial regulators offered a variety of delays and exemptions from the Volcker Rule as banks pressed for broader changes, but the industry had all but given up on major fixes until Trump’s 2016 election.

Trump has since stocked bank regulators with predominantly Republican appointees, who have advanced several proposals to tailor financial rules defended by their Obama-era counterparts.

The new rule would scrap a requirement for banks to prove that trades enacted to make markets for clients’ speculative investments and efforts underwrite stock offerings comply with regulation as long as the firms follow certain risk mitigation requirements.

The revision would also exempt banks below certain asset thresholds from the rule, create three levels of increasing compliance requirements for banks based on size and complexity, and allows banks to use a looser standard to calculate risk for certain investments. 

Regulators and industry advocates supporting the Volcker rollback called the revision a moderate tailoring of the rule designed to provide clearer, more effective standards for banks.

FDIC Chairwoman Jelena McWilliams, who was appointed by Trump, said the new rule “will provide more clarity, certainty, and objectivity around the Volcker Rule, while tailoring the requirements to focus on those banks that conduct the overwhelming majority of trades.”